Uncertainty and unpredictability within environmental phenomenon, social phenomenon, and governance standards makes it difficult to understand their emerging trends, as well as the impact that the trends may have upon investments.
Nevertheless, there is a recent movement towards environmental, social, and governance standards (ESG) investing; investing that focuses on environmental, social and governance standards used by socially responsible investors in screening investments. An environmental aspect examines a company's performance regarding the environment. A social aspect examines a company's products and services and relationships with employees, customers and the community. A governance aspect examines a company's leadership, internal controls and shareholder rights. The recent movement and growth towards ESG investing is evidenced by the increase in the subsection of ESG focused exchange traded funds (ETFs).
Despite the interest in ESG investing, much of the data used to make decisions based on environmental, social and governance standards of a company is unreliable, as it is self-reported, and often non-quantifiable. For example, hundreds of firms are dedicated to analyzing and rating company ESG performance. However it is unclear what mechanism the firms utilize to analyze and rate company ESG performance. Furthermore, a majority of the ESG data used by firms is binary (yes/no) answers to questions related to corporate policies. The ESG data is compiled from self-reported information and so there is a lack of quantifiable metrics and the ability to compare between different companies. Accordingly, there exists a need for quantifiable metrics related to ESG investing.
Moreover, the environmental aspect of ESG investing has added uncertainty and unpredictability due to a changing climate. The impacts of climate change are far reaching and vast. Climate change has been associated with a rise in global sea levels, melting ice, thermal expansion (the war ruing of ocean water). Additionally, the rise in global sea levels, increase in melting ice and thermal expansion may interact with cyclical phenomenon such as El Ni{umlaut over (n)}o and La Ni{umlaut over (n)}a, thus compounding the volatility of local environment and global climate. Climate change creates new uncertainties for investors as rising global temperatures and sea levels may make weather patterns more difficult to predict. Additionally the global regulatory response to climate change adds uncertainty to the performance of investments. Moreover climate change may also increase the risk of modeling error to account for extreme weather risks. Accordingly, there remains a need for a way to better process climate data to understand climate phenomenon and the impact of climate phenomenon on investments.
Additionally, the changing environmental conditions contribute to stock market volatility as the changing environmental conditions may impact, for example, the oil prices that are central to the stock market. Accordingly there is a need for realistic valuations of both energy and non-energy companies in view of a changing climate and local environment and providing a quantitative evaluation of companies most likely to benefit or suffer from climate change. There is a need for systems and methods that are able to relate climate data to economic data and quantifiably measure the impact of climate change on economic investment.